The fund will provide 25% central assistance for projects, subject to cities mobilising at least 50% of project costs from market sources such as municipal bonds, bank loans and public–private partnerships.
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The move is expected to catalyse total investments of around Rs 4 lakh crore in the urban sector between FY26 and FY31, marking a shift from grant-based financing to outcome-oriented and market-linked urban transformation.
The scheme will be operational from FY26 to FY31, with an extendable implementation period till FY34, and gives effect to Budget 2025–26 proposals relating to Cities as Growth Hubs, Creative Redevelopment and Water & Sanitation infrastructure.
Here is a look at what the reset entails:
Market-Linked Urban Financing ModelThe Urban Challenge Fund seeks to position Urban Local Bodies (ULBs) as a bankable asset class by encouraging structured private participation and risk-sharing frameworks. Projects will be selected through a competitive challenge mode, with funding linked to reforms, milestones and clearly defined outcomes.
A strong reform thrust has been built into the framework, covering governance digitisation, financial strengthening, operational efficiency, urban planning reforms and defined Key Performance Indicators (KPIs) backed by third-party verification.
Rs 5,000 Crore Credit Guarantee for Smaller Cities
To facilitate first-time access to market finance, the Cabinet has approved a Rs 5,000 crore Credit Repayment Guarantee Scheme targeting 4,223 cities, including Tier-II and Tier-III urban centres.Also Read: Cabinet approves Rs 1.60 lakh crore rail, bridge and other projects in last meet at South Block
Under the scheme, smaller Urban Local Bodies (with population below 1 lakh) and cities in northeastern and hilly states will receive a central guarantee of up to Rs 7 crore or 70% of the loan amount (whichever is lower) for first-time borrowing. For subsequent projects, the guarantee will extend up to Rs 7 crore or 50% of the loan amount.
The framework is designed to enable projects of at least Rs 20 crore initially and Rs 28 crore for follow-on proposals.
Focus Areas: Growth Hubs, Redevelopment, Water
Projects under the fund will be anchored around three verticals:
Cities as Growth Hubs, focusing on economic nodes, transit-oriented development, mobility and corridor-based expansion
Creative Redevelopment of Cities, including renewal of central business districts, heritage cores, brownfield regeneration and climate-resilient retrofitting
Water and Sanitation, covering water supply upgrades, sewerage, stormwater systems, integrated waste management and legacy waste remediation.
The fund will cover all cities with population above 10 lakh, all state and UT capitals, major industrial cities with over 1 lakh population, and smaller ULBs through the credit guarantee route.
Reform-Linked, Outcome-Oriented Framework
Funding under UCF will be conditional on sustained reforms across governance, financial management, service delivery and spatial planning. Continuation of reforms will be a prerequisite for fund release, with paperless monitoring through a unified digital portal of the Ministry of Housing and Urban Affairs.
Officials said the initiative is expected to catalyse large-scale private investment, improve urban creditworthiness, create jobs and accelerate the development of resilient, climate-responsive cities positioned as engines of India’s next phase of economic growth.